V.Phani Kumar

The Australian dollar jumped and Sydney shares edged higher after the central-bank surprised with an interest-rate increase. A similar move by the Reserve Bank of India weighed down real-estate developers in Mumbai.

Trading volumes were modest as investors were generally reluctant to buy into stocks ahead of the Fed’s policy meeting on Tuesday and Wednesday.

The Fed is widely expected to unveil a second round of quantitative easing, informally referred to as QE2, to recharge an anemic U.S. economy, amid question marks on the size and scope of the stimulus.

“It’s all about QE2,” said Nick Burmester, an institutional trader at MF Global in Sydney. “Everyone’s getting bearish on the size of it, but markets are still priced for close to $1 trillion. We can’t see a lot of upside in a big number because it’s in the price.”

Markets were also keeping a watch on U.S. midterm elections Tuesday, which are expected to see some large gains by Republicans in the U.S. House of Representatives.

Monetary-policy decisions took center stage after the Reserve Bank of Australia hiked its cash rate a quarter-point to 4.75% in a surprise decision. Commonwealth Bank of Australia lifted its mortgage rates in the wake of that decision.

Later in the day, the Reserve Bank of India raised interest rates for the sixth time this year, taking its policy lending rate a quarter-point higher to 6.25%, as was widely expected. Read full story on RBI’s rate increase.

“Additional tightening in Australia and India also follows China’s decision to commence raising rates in October, and underscores the widening gap between Asia’s buoyant economic situation and that faced by its North American and European counterparts,” said Matt Robinson, a senior economist at Moody’s Analytics, in e-mailed comments.

The RBA move helped trigger a rally in the Australian dollar and other risk-sensitive currencies such as the euro. The Australian dollar, which achieved parity against the U.S. dollar in the wake of the rate increase, was more recently at 99.98 U.S. cents compared with 98.88 cents prior to the RBA move. Read full story on the RBA move.

Australian equities ended a tad higher after fluctuating between gains and losses, with materials stocks lower after outperforming on Monday. Trading was also subdued due to Tuesday’s Melbourne Cup race.

Westfield Group Australia (WDC) tacked on 1.9%, extending gains in the wake of recent reports of potential asset sales. Investors were also buying after the multinational shopping-center group last week opened its new flagship in Sydney, with 130 fashion and food specialty stores.

In Mumbai, real estate stocks tumbled in the wake of the RBI rate increase, with DLF sliding 3.9% and Unitech falling 3.8%.

In Tokyo, some exporters advanced after taking big losses recently, with Toyota Motor Corp.
TM, +0.38%
(7203) rising 1.1% and Canon Inc.
CAJ, +0.84%
(7751) adding 0.6%. But investors remained cautious ahead of the Fed and U.S. election outcomes and a national holiday in Japan on Wednesday.

“The key issue is whether the weak dollar trend will reverse” after the Fed meeting, said Kenichi Hirano, operating officer at Tachibana Securities.

The South Korean market was trading lower as investors took to the sidelines ahead of the Fed decision.

“The market’s consensus on the size of the Fed’s measures has been lowered, to around $500 billion. The market will cheer if the result comes in above that expectation, but if it is below that, some shocks (for stocks) are expected,” said Daishin Securities’ Park Jung-seop.

In foreign-exchange markets, the euro rose along with the Australian dollar after the RBA’s surprise move, which marked the first hike in six months. The central bank had raised rates by 1.5 percentage points from late 2009 until May of this year.

“The decision obviously took the market by surprise, especially following last week’s slightly softer (Australian) inflation data,” said Credit Agricole Corporate & Investment Bank in a note to clients.

“High terms of trade and modest spare capacity will contribute to the need for further tightening further down the line and we look for further hikes, with at least another” quarter-point move in the first quarter of 2011, the note said.

The euro was fetching $1.3956 compared with $1.3885 late Monday in New York, and 112.45 yen against 111.91 yen. The dollar was at 80.57 yen, versus 80.60 yen.

Lead Japanese government bond futures were down 0.05 at 143.03 points, while the 10-year cash JGB yield was down 0.5 basis point at 0.940%.

Spot gold was at $1,356.70 a troy ounce, up $5.40 from its New York close Monday.

December Nymex crude-oil futures were up 54 cents at $83.49 a barrel on Globex.

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